EIDP, Inc. annual report, FY2011

E. I. du Pont de Nemours and Company: FY2011 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2011. The filing is an annual Form 10-K, not a standalone fourth-quarter filing; quarterly data are provided for context. DuPont operated in more than 90 countries, employed approximately 70,000 people, and generated approximately 65% of consolidated sales outside the United States. Reportable segments included Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection, and Pharmaceuticals.

Financial performance and position

Metric	2011	2010	Change
Net sales	$37,961 million	$31,505 million	Up 20%
Income before income taxes	$4,282 million	$3,711 million	Up 15%
Net income attributable to DuPont	$3,474 million	$3,031 million	Up 15%
Diluted EPS	$3.68	$3.28	Up 12%
Effective tax rate	18.0%	17.8%	Up 0.2 points
Cash from operating activities	$5,152 million	$4,559 million	Up 13%
Free cash flow	$3,309 million	$3,051 million	Up 8%
Cash, cash equivalents and marketable securities	$4,019 million	$6,801 million	Down $2,782 million
Total debt	$12,553 million	$10,270 million	Up $2,283 million

Net sales growth reflected higher local selling prices, Danisco-related sales, currency benefits and a 1% increase in worldwide volume. Price increases were particularly significant in titanium dioxide, seeds, fluoroproducts and electronic products. Fourth-quarter volume declined because of destocking in photovoltaic, polymer and industrial supply chains and weaker consumer electronics and construction demand.

Income benefited from pricing, volume and currency effects, but was partially offset by higher raw-material, energy and freight costs, increased growth spending, lower Pharmaceuticals income and unusual Danisco and Imprelis charges. Cost of goods sold and other operating charges were 73% of sales, unchanged from 2010. Selling, general and administrative expense declined to 11% of sales from 12%, while research and development expense remained 5% of sales.

Year-end working capital was $6,873 million versus $9,670 million in 2010. Total assets increased to $48,492 million from $40,410 million, primarily reflecting the Danisco acquisition. Total equity declined to $9,062 million from $9,743 million, including a significant increase in accumulated pension and other comprehensive losses.

Cash flow, debt and liquidity

Operating cash flow increased to $5,152 million, despite higher inventories and receivables.
Investing cash outflow was $6,238 million, including $6,459 million for business acquisitions and $1,843 million for property, plant and equipment.
Danisco was financed partly through $2.0 billion of senior notes, $1.0 billion of commercial paper and assumed debt. Total debt increased to $12.553 billion.
DuPont reported approximately $4.4 billion of unused credit lines and investment-grade ratings of A/A-1 from Standard & Poor’s, A2/P-1 from Moody’s and A/F1 from Fitch, all with stable outlooks.
Common and preferred dividends paid totaled approximately $1.5 billion; common dividends were $1.64 per share. The company repurchased and retired 13.8 million shares for $672 million in 2011.
Contractual obligations totaled approximately $20.969 billion, including $12.123 billion of long-term debt obligations, $3.731 billion of interest payments, $2.239 billion of purchase obligations and $1.604 billion of other long-term liabilities.

Material changes versus the prior comparable period

Danisco acquisition: DuPont acquired Danisco for approximately $6.4 billion plus $0.6 billion of net debt. Danisco contributed $1.713 billion of sales but approximately $(7) million of net income attributable to DuPont, excluding $30 million after-tax of acquisition-financing interest expense.
The acquisition added approximately $2.796 billion of goodwill and materially increased intangible assets, debt, depreciation and amortization.
Danisco-related 2011 charges included $85 million of transaction costs, a $175 million pretax inventory fair-value step-up charge and $53 million of restructuring charges. Management expected at least $130 million of annual pretax cost savings beginning in 2012, with approximately $50 million of additional integration costs through 2013.
Pharmaceuticals PTOI declined to $289 million from $489 million as Cozaar/Hyzaar patents expired. Management expected collaboration earnings to decline to approximately $50 million in 2012.
Performance Chemicals PTOI increased to $1.923 billion from $1.081 billion, while Electronics & Communications PTOI declined to $355 million from $445 million because of second-half destocking and weaker demand.
2011 included a $175 million charge for Imprelis herbicide claims and a $50 million Agriculture research and development licensing charge. Performance Materials included a $49 million gain on a business sale.
Pension benefit obligations increased materially, with the reported funded status deficit reaching $9.289 billion versus $5.521 billion in 2010. Lower discount rates were expected to increase 2012 long-term employee benefit expense by approximately $225 million.

Guidance, outlook, risks and unusual items

For 2012, management expected sales and earnings to benefit from a strong Agriculture economy, innovation, productivity and a full year of Danisco operations. Offsetting factors included a stronger U.S. dollar, higher tax rates, and higher raw-material, energy and freight costs. DuPont targeted approximately $300 million of fixed-cost productivity actions, $2.1 billion of capital expenditures and $300 million of working-capital productivity improvements.

Management expected Agriculture earnings growth, but identified commodity costs and weather-related production yields as risks.
Electronics & Communications expected recovery in photovoltaics and consumer electronics during the second half of 2012.
Performance Chemicals expected continued demand for titanium dioxide, fluoropolymers and industrial chemicals, with planned capacity expansion.
Environmental remediation liabilities were $416 million. Management stated that potential liability could be as much as three times the accrued amount under adverse circumstances.
PFOA-related accruals were $16 million. A scientific panel identified a probable link between PFOA exposure and pregnancy-induced hypertension; potential medical-monitoring obligations were not yet estimable, although the settlement capped medical-monitoring obligations at $235 million.
Imprelis claims remained subject to possible additional charges beyond the $175 million accrued in 2011. DuPont intended to seek insurance recovery for costs exceeding $100 million.
Key broader risks included energy and raw-material inflation, product development and regulatory approvals, litigation and environmental matters, pension-market performance, foreign exchange, global economic weakness, supply disruptions, cybersecurity and intellectual-property protection.

Most important facts for investors to verify

Whether Danisco achieves the expected synergies and earnings contribution after integration costs and acquisition accounting effects normalize.
The ultimate cost of Imprelis claims, PFOA-related matters, environmental remediation and other litigation or indemnification obligations.
Whether higher input costs can be offset through pricing and productivity, particularly in Performance Coatings and Performance Materials.
The impact of the Cozaar/Hyzaar contract expiration on recurring cash earnings and the timing of the expected decline to zero.
The sustainability of operating cash flow and free cash flow after increased capital expenditures, debt service, dividends, pension funding and acquisition-related obligations.
The effect of pension deficits, lower discount rates and expected 2012 benefit-cost increases on earnings and cash requirements.
The accuracy of management’s 2012 assumptions regarding Agriculture demand, second-half market recovery and currency movements.